Businesses have to constantly be on the lookout for the next best investment hubs, with strategic site selection taking on even more importance in an era marked by growing competition and rising global volatility. The demise of the BRICS has more so intensified the emerging market site selection search, and today we see increasing investor interest being directed toward the Association of Southeast Asian Nations (ASEAN), with the region characterized by robust economic growth, favorable demographics and so on. The section below analyzes key factors favorable to ASEAN’s growing emergence as an investment destination in greater detail.

Move toward ASEAN Single Market

Greater economic integration is increasingly being envisaged by ASEAN members under the ASEAN Economic Community (AEC), with targeted free movement of goods and services, investments, as well as skilled labor. In regards to trade conditions, tariffs on goods have already been reduced to a large extent, and the sustained move toward greater free trade will facilitate cross-border trade with minimal tariff and non-tariff restrictions, thereby allowing business to increasingly leverage regional supply chains, minimize costs, and reach a wider market base of over 600 million persons (combined population of ASEAN countries). Commitment toward enhanced regional integration is evident through the AEC Community 2025, which amongst other targets, strives for the sustained removal of tariff barriers and non-tariff barriers on goods, elimination and minimizing of investment related restrictions, and so on.

Sizeable Economy and Robust Growth Rates

As can been seen from the exhibit below, ASEAN is expected to move up the ranks from being the 6th largest economy in 2016 to the 5th largest by 2020, with anticipated gross domestic product (GDP) growth in the range of 4.9% to 5.4% and with private consumption being a key growth driver.

Exhibit 1: Top 10 Ranking Economies in terms of GDP Size {Measured by Nominal GDP ($ billion)}, Global, 2016 and 2020

ASEAN’s largest member countries in terms of GDP such as Indonesia and Malaysia are expected to clock in growth rates between 4.6% and 6% over the next four years, while frontier markets such as Cambodia, Laos, and Myanmar are expected to register rates between 6.5% and 7.8%. These three frontier markets were in fact amongst the world’s top 10 fastest growing economies in 2015. The region’s robust growth rates in comparison to tepid growth across BRICS (barring India and China, although China’s growth is weakening) and advanced economies such as the United States, Japan, and Euro area incentivizes expanded operations across ASEAN countries.

Burgeoning Middle Class Population

Data from the Asian Development Bank reveal that ASEAN’s middle class population is expected to expand from 24% in 2010 to 65% in 2030. The sheer size of ASEAN’s population coupled with the rising affluence of consumers will continue to spur private consumption demand. Growing demand for goods and services should spur greater investments into ASEAN; given that proximity to markets help firms maintain competitiveness. Moreover, firms investing in frontier markets such as Myanmar and Cambodia can also reap the benefits of first mover advantages.

Labor Related Advantages

On one hand, countries such as Malaysia, Vietnam, and Brunei enjoy labor cost competitiveness, with the hourly minimum wages in Malaysia and Vietnam ranging from $0.88 to $1.17, compared to $10.64 in New Zealand and an average of $7.57 in Japan. Lower wages along with move toward greater regional integration allows firms to establish production in lower wage ASEAN countries, while sourcing parts and supplying finished products to ASEAN countries at competitive rates. While Singapore may not enjoy the advantage of affordable labor, the country’s quality of talent has been often cited by MNCs as amongst the key reasons for doing business in Singapore. The ability to source high level talent from globally reputed universities such as and Nanyang Technological University and the National University of Singapore along with worker expertise in English are among the key reasons for Singapore’s emergence as a go-to destination for advanced manufacturing activities.

The leaders of the ASEAN countries will have to work to address challenges such as infrastructural deficiencies, slow pace of integration in regards to services and investments and so on in order to foster greater growth and development over the coming years. Nonetheless, rising foreign direct investment (FDI) over the years points to the international recognition of ASEAN’s competitive advantages as well as its growing emergence as a global investment hub, with investor interest expected to only strengthen amidst China’s weakening labor cost competitiveness.

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